The stock market continues to be under pressure due to geopolitical tensions and various economic problems. But even in these challenging times, some companies are performing well. For instance, cancer-focused biotech company Exelixis (EXEL 0.27%) has run circles around the broader market year to date. While that's great news for the drugmaker and its shareholders, there are also reasons to worry.
With a forward price-to-earnings (P/E) ratio of nearly 19 -- compared to an average multiple of 12 for the biotech industry -- Exelixis' shares don't look cheap. Given how volatile the market has been, the company's stock could drop substantially if it fails to deliver results in line with investors' expectations. Can Exelixis continue beating the market from here on out?
Recent financial results
Exelixis' key product is called Cabometyx. It is a cancer medicine approved for the treatment of renal cell carcinoma (RCC, a form of kidney cancer) and hepatocellular carcinoma (HCC, a form of liver cancer). Cabometyx remains the top-prescribed tyrosine kinase inhibitor (a type of cancer medicine that targets and attacks cancer cells) in RCC. The therapy's dominance in this narrow field is one of the reasons why it continues to be successful. Another reason is that it keeps grinding out new indications.
Exelixis' total revenue jumped by 31.7% to roughly $356 million in the first quarter. The company owed this performance to a new indication Cabometyx earned last year. In January 2021, Cabometyx was approved with cancer treatment Opdivo -- which keeps earning new regulatory wins of its own -- as a first-line combination treatment for RCC. Meanwhile, Exelixis' adjusted earnings per share nearly tripled to $0.26 in the first quarter. Overall, it was a pretty strong quarter for Exelixis.
The long-term view
One problem with Exelixis' business is that it is highly reliant on a single product, namely Cabometyx. Sure, this medicine has been massively successful. And what's more, it will likely earn many more indications. Cabometyx is currently being evaluated in dozens of clinical trials. There will be more approvals for the cancer therapy, which will help Exelixis' revenue stay on the right track. With that said, the lack of diversification in the biotech's lineup is an issue.
The company is aware of this fact, and it is currently looking to develop new therapies. Exelixis' early-stage pipeline includes a quartet of potential cancer medicines in phase 1 clinical trials, among others that haven't started clinical studies yet. The most advanced of the bunch is XL092; Exelixis plans on beginning a pivotal clinical trial for this investigational cancer treatment soon.
Exelixis' potential cancer therapies could become successful, but they aren't approved yet. And as per usual in the biotech industry, they could run into clinical or regulatory headwinds. It seems likely that at least a couple of Exelixis' products will eventually earn approval, but that won't happen for at least a couple of years. Meanwhile, Cabometyx's various patents will start expiring as early as 2024.
If generic competition enters the market before Exelixis can decrease its exposure to this medicine, the company's financial results will suffer. That's a significant risk to take into consideration. On the other hand, with a debt-to-assets ratio of zero, Exelixis has no debt to speak of on its balance sheet.
Incurring some debt isn't a horrible thing. Exelixis' current situation could allow it the flexibility to raise funds to acquire a promising clinical compound from another biotech in case its current pipeline programs aren't successful. Whether through its internal discovery process or acquisitions, Exelixis is committed to unearthing another gem like Cabometyx.
Still, the risk associated with its crown jewel losing patent exclusivity cannot be ignored. Exelixis is a promising biotech stock, but I believe it'd be best for investors to wait for a better entry point.